Returns On Capital - An Important Metric For Payton Industries (TLV:PAYT)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Payton Industries (TLV:PAYT) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Payton Industries is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = US$10m ÷ (US$67m - US$7.2m) (Based on the trailing twelve months to September 2020).

Thus, Payton Industries has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 7.9% it's much better.

View our latest analysis for Payton Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Payton Industries' ROCE against it's prior returns. If you're interested in investigating Payton Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Payton Industries. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 65%. So we're very much inspired by what we're seeing at Payton Industries thanks to its ability to profitably reinvest capital.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Payton Industries has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for Payton Industries that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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